Debt a Lingering Issue for Shopping Center REITs in 2008

With 10 of the 14 shopping center REITs having reported their fourth quarter 2007 earnings, including most of the largest firms, the sector seems to have weathered the economic slowdown as well as its regional mall counterparts. Of the companies reporting, more than half missed consensus estimates for the fourth quarter by less than $0.02 per share, and four firms reported positive FFO growth.

REITs that have yet to file their fourth quarter results include Ramco-Gershenson Properties Trust, which is expected to report later today and Cedar Shopping Centers and Weingarten Realty Investors, which are both scheduled to report on Feb. 27. AmREIT Inc. has not announced its reporting date.

"It looks like everyone was relatively in line with their projected estimates," said Jason Lail, senior research analyst with Charlottesville, Va.-based research firm SNL Financial LC.

As with regional mall REITs, shopping center REITs should focus on maintaining clean balance sheets and curbing in 2008, Lail notes. That shouldn't be too difficult. "Looking at total debt and total caps, the balance sheets of shopping center REITs look a little better than the REIT sector in general," he says.

Federal Realty Investment Trust, which carries one of the most conservative balance sheets in the sector, was among the best performers. The Rockville, Md.-based REIT posted FFO growth of 19.48 percent for the fourth quarter 2007, to $0.92 per share, and an 11.35 percent increase in FFO for the year, to $3.63 per share. Federal also maintained healthy operating metrics, with same-store NOI growth of 4.2 percent for the quarter and 3.5 percent for the year and a 20 basis point increase in portfolio occupancy, to 96.7 percent.

Federal's clean balance sheet will remain its biggest trump card, wrote RBC Capital Markets analyst Rich Moore in a note last week. The company's debt and preferred equity account for only 26 percent of its capital. With only $500 million in debt maturing over the next four years, the company faces fewer risks than its highly-leveraged rivals.

"What we've seen so far this earnings season is that retail real estate companies are not facing any significant danger from the collapse in single-family housing, the dysfunctional credit markets, or the impending threat of recession," Moore wrote. "Nonetheless, we continue to believe that a conservative balance sheet is a better option in a period of uncertainty."

Federal owns 92 properties totaling 19.5 million square feet. The firm expects FFO growth for 2008 to be in the $3.89 per share to $3.94 per share range. (See chart for more company results.)

Missing consensus estimates by $0.01 per share for the quarter was Kimco Realty Corp., while still posted better than expected overall performance for 2007. New Hyde Park, N.Y.-based Kimco reported an FFO decrease of 8.62 percent in the fourth quarter, to $0.53 per share, and an FFO increase of 17.19 percent for the year, to $2.59 per share. Kimco's same-store NOI rose 4.10 percent for the quarter. It reported NOI growth of 4.5 percent for the eight quarters since 2005. Occupancy in the firm's portfolio grew 60 basis points, to 96.3 percent.

Kimco's balance sheet remains in "fantastic shape," writes Morningstar analyst Akash Dave. Dave estimates that debt and preferred equity account for just 31 percent of the firm's capital. But while he feels that Kimco should continue to enjoy easy access to new funds in 2008, its executives warned they will err on the side of caution when it comes to the company's development pipeline. That means that some projects will be delayed and others aborted altogether, especially when it comes to mixed-use properties, which have been hammered in the current economic slowdown.

Kimco owns a portfolio of 1,163 properties, totaling 158 million square feet. The firm expects FFO growth of $2.70 to $2.78 per share in 2008.

Beachwood, Ohio-based Developers Diversified Realty missed consensus estimates for the quarter and 2007, by $0.01. The REIT posted flat FFO growth in the fourth quarter, at $0.82 per share, and an 11.14 percent increase in FFO for the year, to $3.79 per share. Developers Diversified's same-store NOI growth missed analyst expectations as well, with 2.5 percent for the quarter and 2.35 percent for the year. The occupancy at its portfolio of 500 properties totaling 117 million square feet declined 20 basis points, to 96 percent.

Developers Diversified carries a somewhat larger debt load than its peers, at 43 percent of its capital, according to Morningstar, but its challenge might lie in its development pipeline, which currently stands at $1.2 billion.

"Many investors consider it to be far too great a risk in a climate of economic uncertainty," wrote Moore in a Feb. 13 note.

Developers Diversified did not provide guidance for FFO for 2008.

In addition, Saul Centers reported FFO growth of 4.5 percent for the quarter, to $0.70 per share, and 7 percent for the year, to $2.75 per share. Same-store NOI for the property's retail portfolio increased 3.1 percent for the quarter and 3 percent for the year. Occupancy went down 100 basis points, to 95.3 percent.